(Lecture notes for the Week 2 Second Session, Wednesday, 2/19/14) Introductory Pricing/Marketing Workshop for Grains, On-Line
Review
Breakeven Basis
First four pricing tools
Continue with
With three more pricing tools
New
Begin Commodity Options
Breakeven Basis, when do you lift a Hedge?
Break-Even Basis Line helps us answer two questions.
1) Should we hedge? a. Basis needs to be weaker than the B-E Basis Line to consider hedging.
2) When to get out of/lift the hedge? a. When basis strengthens to B-E Basis, consider lifting hedge.
3) When a hedge would no longer pay, consider lifting yours.
CBOT CORN Mason, MI
Mon Price Chg Delivery Basis Cash
Mar 14 445'2s 4'6 FEB 2014 -0.40 4.05
Mar 14 445'2s 4'6 MAR 2014 -0.38 4.07
Jul 14 455'0s 4'0 JUN 2014 -0.30 4.25
Dec 14 459'6s 3'4 O/N 2014 -0.50 4.10
HEDGE(Hedge‐to‐Arrive)
PricesUp
PricesDown
(FuturesMonth) (Buy) (Buy)ActualBasis
CashPrice PlusNetReturnsfromFuturesSellandBuy
Less: StorageCost BrokerageCost EqualNetReturns EqualsNetPriceReceived
(FuturesMonth) (Sell)ExpectedBasis
StorageCosts
BrokerageCosts
NetExpectedPrice
BASIS CONTRACT (Futures Month) (Price) Less: Cash Price
(Deliver Cash) Basis Contract ____________
Prices Up Prices Down (Futures Month) (Price) (Price) Less: Basis Contract Equals Net Price Received
SELL CASH and BUY FUTURES (Futures Month) (Buy) Cash Price
(Sell) Actual Basis
Prices Up Prices Down (Futures Month) (Sell) (Sell)
Cash Price Plus Net Returns from
Futures Buy and Sell
Less: Brokerage Cost Equals Net Price Received Actual Basis
I
· .
INSURANCE
Substitution of a small but
certain loss (insurance premium)
for the possibility of. a large .
uncertain loss.
""
/'
, .' t t, '
....\.~.
'.
COMMODITY OPTIONS
MARKET
Market in which producers may
purchase the "opportunity" but 'not thei= / ...j r_ "'}'\. 1...--1- ('-...., r ...", '.
"obligation" to· sell' or buy a C6mmed·~
,at a certain price.
"
l ) I \
ww
00
--
a:a:
a.a.
(J)C
'C
'Z
Zt-
--
~~~.
W...I
>~
...I:::)
~"
a:w
£D.<C
(J)':E
)
~~
C'
~C'
0Z
·Z
---\
.3=-
a:a:
:::)t-
:::)(J)
(J)Z
Z- ~
-~
~~.
I.I
_...~, ..
Want rigl't,t to sell corn for S3.00/bu.
Purchase right in options market by a remium
If price when ready to
sell is above S3.00
- sell for higher price
.If price is below $3.00
- "collect on policy"
.. (I I J
I'. . I J
-0'
_0
.CALL OPTION .
--A contract that gives the holder the °
right to b\.lY_at a specifiedprice_. .. " ..-". .
° "To call- from them"o
- !I \
-/ ) ). \ -I
)
PUT·' OPTION
A contract that gives the ·holder
the· right to sell at a specified price
"T0 put it on them"
t ." \1 \
z0-t-
t-o.en
0a::
zw
-<C:c
Wt-
t->-----
CO>-
::Ja::0
COD
]W0
c.
C:c
wZ
...I~.
>-0
0w
z>
-:I:0
z1-..........,
en0
C.
a:()
i
W
i~
0,
a.en
i"i
t-i
__
-.
W:c
:c(!'
t--cc·
..~
00
.W
IJ:
..J:
I-S2
(J)a:
..JW
I..J
:e
wI-
z(J
)·oo
-I-
Co:c
zW
::«a:
..~«Z
(!'t-
OC
oZ,
(J)Z
a:~
(Jw
~
a..z
wQ
:el-
I-a..o
·EXERCISE .... OR
-STRIKE PRICE .
·THE .SPECIFIED PRICE AT
- WHICH THE OPTION
PURCHASER MAY BUY OR
SELL THE COMMODITY
'A':::,'
) ) \ I I \ I I j i ~ I I I I ) I
enw>
t%:
W1
-..::)
:r:.-C
'l-
I-e
·z::)
l-e
-U
.~
>0
..I<C
:Ez
t%:
ew
en~
I-0
e-
0z
>..I
<C::)
.1-<C
cc-
0e
wl-
e-
::E:Z
enI-
~0
>:E
0:r:D
.e0
:E'
::),-':EW1:1:'0
.Zo-,I-0
.o
w::)'•
..Jz·.<C
0>
-I-~
WO
~w
I:I:::J:~I-W
LL::J:0
.I-
LLoW~
o~
_W
1:1:0
o.Z
w<
C::J:I:I:I-~
Ii'
Z1
--
,0~
WW
LL
::J:L
LI
WZ-
.FAC'TORS AFFE~CTING, . .
.PREMIUMS·
- DIFFERENCE BETWEEN THE STRIKE.. . ..
t~· - PRICE OF THE OPTION AND THE PRICE.. . .
·0F THE UNDERLYING COMMODITY
- LENGTH.OF TIME TO EXPIRATION
\ I I ) I J J I
INTRINSIC VALUE .
.'1'
,,;..if
., \
f/'
i
i::~",
.i1i
"POSITIVE" DIFFERENCE BETWEEN
STRIKE PRICE AND UNDERLYING
COMMODITY PRICE
FOR A PUT - STRIKE PRICE EXCEEDS
- FUTURES PRICE
FOR A CALL - STRIKE PRICE BELOW
FUTURES PRICE/
/
~'. ,itT'
.~
:....... ,~. f·
/I
\
JlJ".11'3: ' ~.' .. l~'\. !".
" i~;~,
"~~
i~~~~).,.l I !
":i7rl,
-
•"?
-,W
W,;
::)::)
..J..J
c:ec:e
w>
>a:
0~
0c:e
>••
--
1-'W
enw
en-
InZ
ZZ
<CI
-0
-_.
:J:0
~a:
a:I
>:E
l-t-
l-I-
wI
WI
·zZ
-i
enz
'>J:
c-
-~:;
.-;
:J:...---
Z-
0W
0<C
I-0
:E>
en•
z-
,.<C
U.
'I-W
'0W
a.:J:
:J:>
0~
I-<C
,.::::)
Z:J:
0- ~
'I!'I!
""F i-4~i;-;'i,~~!f,~P'(, ;:".
:j..
TIME· VALUEi
J
PORTION OF OPTION pREMIUM
RESULTING FROM LENGTH OF.TIME TO EXPIRATION
USl»LLY T~ME VALUE DECREASES;.'~~~'
. WITH LENGTH OF TIME UNTILEXPIRATION,
!
1· I .1 . I I i I
z«IwenU.
U.
o
Wt
l-e:(Z
Co
--
::lI-
0Z
a.-
0o
...Ji=
C'
0CiS
ZI-
0i=
cc0
enw
..z-
cx
a:0
w0
i=z
.z0
e:(
-0
,
:Jb
.~.w
e:(I
ena:
ol-
1-.
Zo()
'"
"':'J."
.~.
MONEY FLOWSHolding a soybean $7.00 putpurchasec
for a $0. 15 premium
OFFSETCurrent futures price is $6.50 .
Sell option at a $0.60 premium
.RESULT
Offset premium received
- Original premium paid
Net returns
l.L-;\
$0.60
....0.15
$0.45",·t',:
zo-~0-oZc:ewen-o£
tW><W
ol-I-o«ccIZoozo-I--a..oz<CI-ccW>ZoooI--
Iw·
~0:
«~UJ
W-cc::>I::>LLWJ:-
I--Z-Zo-I--enoa..<C
,~
;.~.
MONEY.·FLOWS.
.Holding a soybean $7.00 put purchased
for a $0.15 premium
. . '. . .
.Current futures price' is $,6.50
Receive a short ·(sell) futures market
.position at $7.00". . "<. ~ ".
\ .\.<>...... .. . . . - .
~. '1"
" " ~::
Buy futures at $6.50 '>
RESULT
Futures gain
- Original premium paid .
Net· Returns
$0"··'. ijlDji
, ~O~1~&J·
'$0::35."'.